President-elect Donald Trump's proposal to cut taxes on Social Security benefits could provide tax relief to millions of Americans, with significant savings for high-income earners. However, experts warn that the plan may have long-term consequences, potentially rendering the Social Security program insolvent within just six years.
According to data from the Social Security Administration (SSA), over 72 million Americans received Social Security benefits as of October 2024, making the programme a critical income source for retirees. Presently, nearly 40% of retirees pay federal taxes on Social Security benefits, with up to 85% of benefits taxable based on income thresholds. Trump's tax cut proposal aims to alleviate this burden, particularly for wealthier recipients.
How Trump's Social Security Tax Cut Proposal Benefits Top Earners
Under Trump's plan, the wealthiest Social Security recipients would see the most substantial tax savings. Experts at the Urban-Brooking Tax Policy Center estimate that individuals in the top 0.1% of income earners, those making around $5 million or more annually, could receive a tax cut of approximately $2,500 in 2025. For Americans earning between $113,000 and $206,000 per year, the average tax savings would be around $1,200. Those with incomes between $63,000 and $113,000 could see an average tax cut of $630, while recipients in the $32,000 to $60,000 income range might receive a modest $90 tax cut. Individuals with incomes below $32,000, whose Social Security benefits are typically not taxed, would not see any tax reduction.
Overall, the proposed repeal of Social Security benefit taxes would reduce the average household tax liability by roughly $550, according to the Tax Policy Center. However, these potential savings raise concerns about the programme's sustainability.
Risk of Insolvency: Social Security's Financial Stability at Stake
The Social Security programme's funding relies on the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. Unlike other government programs, Social Security must maintain sufficient assets to pay scheduled benefits, as it cannot borrow funds to cover shortfalls. Recent forecasts by the Social Security Board of Trustees predict that, without changes, the trust funds will be depleted by 2035, at which point they will only be able to cover 76% of scheduled benefits. The trustees suggest that to prevent shortfalls over the next 75 years, either benefits would need to be reduced by 13%, or payroll tax rates would need to increase to 14.4%.
Trump's proposed tax cuts, however, could accelerate the depletion of the Social Security trust fund. The Committee for a Responsible Federal Budget (CRFB) has estimated that cutting taxes on Social Security benefits could drain $1.5 trillion in revenue over the next decade, hastening the programme's insolvency to as early as 2030. The CRFB explained that Trump's additional policies, such as eliminating taxes on worker tips and overtime and imposing new tariffs, could further strain Social Security's finances, exacerbating its cash deficits.
"We find President Trump's campaign proposals would dramatically worsen Social Security's finances," the CRFB reported. The organisation emphasised that cutting Social Security taxes without supplementary revenue sources or spending adjustments would likely lead to severe cuts in benefits for millions of recipients.
Political Hurdles: Will Trump's Proposal Face Bipartisan Support?
While the proposed tax cuts could offer immediate financial relief, many experts doubt that such a plan would gain the bipartisan support required for implementation. Charles Blahous, a senior research strategist at the Mercatus Center at George Mason University, pointed out the potential opposition from Democrats, who are unlikely to support legislation that risks the programme's solvency.
"It's hard for me to imagine that Democrats would be willing to provide votes to get over that 60-vote threshold and weaken Social Security solvency," Blahous commented.
As discussions around Social Security's future continue, Trump's tax cut proposal has sparked significant debate, balancing the promise of tax relief for recipients with the looming threat of financial instability for the program. With millions of Americans relying on Social Security benefits, the outcome of this proposal will likely have lasting impacts on the nation's retirement landscape.
